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Regional Conflicts in the South China Sea Could Rival the Middle East One Day

By Matthew DiLallo – Jan 5, 2014 at 5:33PM

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With billions of barrels of oil lying underneath contested waters, the South China Sea could one day be the next hot bed of oil fueled conflict.

Sea Hawk helicopters maneuver over the South China Sea. Photo credit: Flickr/Official U.S. Navy Page

The South China Sea reportedly holds 11 billion barrels of oil and 190 trillion cubic feet of natural gas. That might actually only tell half of the story as the US Geological Survey estimates that as much as 22 billion barrels of oil could lie underneath the seabed. Unfortunately, there's no clear way to define who "owns" these resources, as China, Vietnam, Malaysia, Taiwan, the Philippines, Indonesia and Brunei all believe some, or all, of these resources belong to them.

What's more, these are growing countries with increasingly greater pressure being placed on the need for new natural resource supplies. Many of these countries are forced to import a considerable percentage of their overall demand.

This is in fact one reason why nearly a third of all global crude oil passes through the South China Sea each year. The combination of potentially disputed oil underneath the sea, as well as its importance in the global oil trade makes this region a potential future hotbed for conflict. Clearly, peace in the South China Sea is vital to maintain regional stability.

Peace in the region could be volatile in the years to come. This is because the Chinese, in particular, have been aggressors in many instances. For example, the country recently declared an Air Defense Identification Zone that encompasses 1 million square miles of the East China Sea. To combat these moves we're seeing countries like Japan quietly build up its military.

These regional tensions are a major catalyst for defense contractors like Boeing (BA 1.46%). Its new submarine destroyer could play a big role in keeping peace in the region as countries like Japan bulk up their defenses. The U.S. Navy is already deploying several of Boeing's submarine hunters to Japan. Future orders could really fuel Boeing's stock price.

That said, while a potential conflict is a catalyst for Boeing, it represents a risk for American oil and gas producers in the region. Companies like ConocoPhillips (COP -1.98%), which has operations in China's Boahi Bay as well as Malaysia, Indonesia and Brunei, could see its production from the region affected if a conflict over oil reaches the boiling point. ConocoPhillips along with partners Murphy Oil Corporation (MUR -2.11%) and Royal Dutch Shell plc (RDS.A) see its offshore oil and gas production from Malaysia in the South China Sea being a big driver of margin expansion. Taking this high margin oil production offline would have an impact on cash flows, especially at Murphy Oil as it spent 42% of its development capital on Malaysian projects last year.

Investors need to keep an eye on Southeast Asia, and the South China Sea in particular. The oil in place under that sea, as well as its importance as a trade route, could push some nations to the boiling point as they rush to secure their supply of oil. That's a catalyst for some stocks, while a big risk for others.

Invest here and win either way

Fool contributor Matt DiLallo owns shares of ConocoPhillips. The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Stocks Mentioned

Royal Dutch Shell plc Stock Quote
Royal Dutch Shell plc
Boeing Stock Quote
$179.08 (1.46%) $2.58
Murphy Oil Stock Quote
Murphy Oil
$41.75 (-2.11%) $0.90
ConocoPhillips Stock Quote
$112.60 (-1.98%) $-2.28

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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